Study: New HFs Make Investors Wait Longer To Redeem

Feb 27 2014 | 1:38pm ET

A recent study suggests the power dynamic between investors and hedge fund managers is shifting, with new managers making investors wait longer to redeem their holdings.

In its latest annual New Hedge Fund Study, law firm Seward & Kissel reveals 89% of new funds (up from 64% in 2012) restricted redemptions to a quarterly or longer-term basis.

And after all the post-crisis talk of increased liquidity, only 11% of funds allowed monthly redemptions in 2013, compared to 36% 2012. Moreover, the number of funds employing “hard lock ups” (usually one year in length) rose from 8% in 2012 to 27% in 2013.

But managers' increased leverage may have its limits—the report also shows the average hedge fund management fee fell slightly in 2013, from 1.688% to 1.663%, with the median fee holding at 1.75%. 

As in 2012, the management fee numbers revealed a distinction between funds pursuing equity-related strategies and those pursuing non-equity strategies.  Funds with non-equity strategies again imposed higher management fees, although the rate disparity between the strategies narrowed as the mean management fee for non-equity-strategy funds decreased to from 1.95% to 1.825% while the mean management fee for equity strategy funds decreased less (from 1.67% to 1.58%).

Equity-related strategies continued to predominate in 2013, accounting for 65% of all funds, compared to 64% in 2012.

The study also noted that 43% of new funds received some form of founders capital; that management fees imposed on founders class investors were, on average, 30 basis points lower than those imposed on flagship classes; and that the average incentive allocation was 16.1%.

Sponsors of both U.S. and offshore funds set up master-feeder structures over 90% of the time.  Most offshore funds were established in the Cayman Islands, although other jurisdictions (e.g., Bermuda, Bahamas) sought to re-establish their respective presences in the industry.

Said Seward & Kissel Partner (and lead author of the study) Steve Nadel, in a statement:

“The spread in management fees between funds that employ equity-related strategies and those with non-equity strategies, as well as the move towards tightened liquidity, have been particularly interesting findings of this study. The narrowing of the average management fee disparity between equity and non-equity strategies that we saw this year could indicate that non-equity hedge funds are offsetting the higher overhead generally required to implement their strategies through technological and other efficiencies. The toughening of liquidity provisions may indicate that managers are making adjustments necessary to efficiently manage and maintain their portfolios.”
 

 
 


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Chicago-based independent futures brokerage and clearing firm R.J. O’Brien & Associates (RJO) has hired industry veteran Daniel Staniford as Executive Director, responsible for the firm’s institutional business development in New York and London.

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